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Hannon Armstrong: Overvalued As Market Continues To Ignore Mortgage REIT Basics

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A statement of upwind turbines successful sunny agrarian France - cleanable renewable energy

Justin Paget

Dear readers/followers,

In this article I want to analyse a owe existent property finance spot ("mREIT") focused connected renewable energy, because I judge nan assemblage is apt to look superior tailwinds complete nan adjacent decade arsenic countries effort to transition distant from their dependency connected fossil fuels. Also, nan precocious passes Inflation Reduction Act will supply 10-years of taxation credits successful an effort to support greenish energy, which could importantly thief companies that run wrong nan space.

Overview

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) is simply a owe REIT focuses connected sustainable infrastructure investments crossed nan U.S. The institution chiefly invests successful projects related to renewable energy, power efficiency, and ambiance solutions. The portfolio is composed of a assortment of sustainable infrastructure investments, including upwind and star powerfulness projects, power ratio retrofits, and different cleanable power projects. HASI presently has complete 340 investments worth a full of $4.3 Billion and diversified crossed various sectors, pinch astir 57% of nan portfolio invested successful Behind-the-Meter projects (meaning nan power is some generated and consumed on-site), 39% successful Grid-Connected projects (larger standard projects successful upwind and solar), and nan remainder successful Sustainable Infrastructure projects. In addition, HASI besides manages astir $5 Billion of off-balance expanse assets connected which it earns a fee.

portfolio

HASI Q4 2022 Report

Financials

The institution has conscionable reported their 2022 results. Distributable net summation by 11% YoY to $2.08 per stock - a awesome result, which reaffirmed management's guidance to turn their EPS by 10-13% from 2020 until 2024. The institution remains connected way to deed their 2024 median EPS target of $2.40 per share.

guidance

HASI Q4 2022 Report

The company's maturation comes mostly from its expertise to turn its pipeline of investments. In 2022, nan institution closed transactions worthy $1.8 Billion and grew its portfolio by 19% YoY. For 2023 they person a pipeline of imaginable transactions worthy complete $4.5 Billion. Of course, not each these transactions will close, but nan institution surely has imaginable to deed its targets.

What makes nan institution profitable is simply a comparatively ample and increasing dispersed betwixt nan output they're capable to gain connected their investments (7.5%) and their costs of indebtedness (4.3%). Since they person very small refinancing consequence until 2025 and nan mostly of their indebtedness is fixed-rate, they should beryllium capable to support this dispersed going forward. Though, if we participate a prolonged play pinch precocious liking rates (even station 2025), nan institution could spot this dispersed narrow. Management provides an illustration (page 15 of report) to show that their dispersed will not constrictive moreover if rates enactment precocious (forecast successful nan floor plan below), though nan mathematics doesn't really add-up successful my opinion.

yield

HASI Q4 2022 Report

The institution has a BB+ standing pinch astir $2.9 Billion of debt, 86% of which is fixed-rate. As we already touched on, location are nary awesome indebtedness maturities successful 2023 and 2024, which is great.

debt

HASI Q4 2022 Report

The institution has declared a dividend of $1.58 per share, translating into a output of 4.5%. With distributable net of $2.08 per share, nan payout ratio stands astatine 76%. With astir of nan indebtedness fixed and small to refinance complete nan adjacent 2 years, nan main consequence to this dividend could beryllium indebtedness defaults. To day however, location has been nary denotation of this arsenic 99% of loans are classified arsenic performing and 1% arsenic somewhat beneath metrics, i.e. pinch a mean risk. I would truthful reason that nan dividend is safe, but frankly very debased compared to different owe REITs, for example, Blackstone Mortgage Trust, Inc. (BXMT) (covered successful my erstwhile article here), which has a astir 11% dividend yield.

The 1 advantage HASI has, however, is its overmuch faster forecasted maturation - still, it would return 6 years of 15% yearly maturation to get to a output connected costs of 10.5%. This doesn't mean that HASI is simply a bad investment, it simply intends that if your main nonsubjective is to cod precocious dividends, location whitethorn beryllium amended alternatives elsewhere.

Valuation

HASI has historically traded astatine a very precocious valuation, but having travel down complete 50% from its highs, immoderate analysts person go very bullish connected nan stock, truthful let's look astatine nan valuation.

HASI is alternatively circumstantial compared to different much accepted owe REITs, but its main business is really beautiful akin - giving retired loans and collecting interest, successful summation to this it earns fees for managing nan off-balance expanse assets. The champion measurement to worth specified institution is to usage P / BV and spot if nan aggregate is reasonably adjacent to 1.0x (ideally below) and really it compares to peers.

Why should nan aggregate beryllium anchored astir 1.0x? Let's person a look astatine an example. Assume that a institution lends $100 and astatine immoderate constituent successful nan early collects liking of 10% connected that money. This liking fundamentally compensates nan institution for nan anticipation that nan borrower defaults. So, assuming that nan borrower repays nan loan, nan consequence adjusted coming worth of this rate travel will beryllium very adjacent to nan first of $100. If nan borrower doesn't repay, nan institution loses nan $100. The business is fundamentally astir collecting mini wins and trying to debar immense losers, but there's nary measurement that nan institution is gonna move nan $100 into $200. Knowing this, really overmuch would you salary for this company? It's easy to spot that paying importantly much than $100 would beryllium foolish.

Now, backmost to HASI - their P/BV stands astatine 1.92x! This is importantly beneath nan crazy multiples seen backmost successful 2021, but still importantly supra nan 1.0x period which marks "safe territory." It is besides double that of peers - BXMT trades astatine 0.87x and LADR astatine 0.96x.

ChartData by YCharts

HASI trades astatine a marketplace headdress of $3.1 Billion and has astir $2.9 Billion successful debt, that intends an endeavor worth (EV) of $6 Billion. While assets are reported connected nan books astatine conscionable $4.76 Billion. This suggests that we could beryllium overpaying.

Now frankly, location are 2 things that this benignant of valuation ignores.

  1. Firstly, nan institution generates fees of astir $22 Million connected nan broadside by managing off-balance expanse assets, which is astir 10% of their full revenues. To estimate nan worth of this, I'll do a elemental backmost of an letter cover calculation. I ideate that this astir apt has precocious synergies pinch nan remainder of their business truthful I'll presume a precocious separator of 60% and an exit aggregate of 15x. This accommodation will springiness maine astir $200 Million of other worth not reported connected nan BS.
  2. Secondly, nan institution has equity investments successful immoderate projects that are fundamentally kept connected nan books astatine costs and relationship for 39% of full assets (see Equity method investments). I person nary thought what nan existent marketplace worth of these could be, but for nan liking of nan calculation let's presume that it's 15% supra nan reported value. This will springiness maine $215 Million of other value.

accounting

HASI Q4 2022 Report

Adding these adjustments to nan existent plus worth reported and we get an adjusted plus worth of $5.18 Billion - still astir 13% beneath nan endeavor worth of $6 Billion. Personally, I would only see this institution if P/BV falls to astir 1.5x again.

Verdict

Hannon Armstrong Sustainable Infrastructure Capital, Inc. has done a awesome occupation of increasing its portfolio arsenic good arsenic its net and is connected way to hitting its 2024 EPS target of $2.40 per share. The dividend is good covered and apt to grow, but is presently very debased compared to peers. Also, HASI still seems to beryllium overvalued. And though it does person further worth compared to a accepted owe REIT, it does not warrant trading a 1.93x book value.

For nan elemental logic of over-valuation, I complaint Hannon Armstrong Sustainable Infrastructure Capital, Inc. arsenic a HOLD present astatine $35.00 per stock and would only see this institution if P/BV falls to astir 1.5x again. Even pinch superb EPS growth, I don't spot overmuch imaginable for value appreciation from these levels, unless HASI banal trades astatine moreover much unrealistic P/BV levels again.

This article was written by

David Ksir floor plan picture

I americium a worth and dividend investor pinch a existent property backstage equity background. Looking for sectors that are apt to outperform to rotate into those and hunting for dividend paying, undervalued gems wrong those sectors.Right now focused connected REITs and Financials. Stay tuned for in-depth analysis.Disclaimer: I americium not a financial advisor and nary of nan contented provided connected this website is financial advice. Content is provided for acquisition purposes only.

Disclosure: I/we person a beneficial agelong position successful nan shares of HASI either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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